When we see records being broken and unprecedented events such as this, the onus is on those who deny any connection to climate change to prove their case. Global warming has fundamentally altered the background conditions that give rise to all weather. In the strictest sense, all weather is now connected to climate change. Kevin Trenberth

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Friday, August 30, 2013

Peter Dorman: More Mental Clutter on Climate Change

by Peter Dorman, Econospeak, August 29, 2013

Certain topics seem to be Sisyphean: you do your best to clarify and
then, there it is, the boulder of common sense sitting at the bottom of
the hill, demanding to be rolled up once again. Elementary issues in
macropolicy, like the fact that contractionary fiscal policy is
contractionary, exemplify this, but so do the basics of climate change.
Here the elements in question are that pricing carbon can go a long way
toward avoiding the worst scenarios, that the primary channel is
economic substitution, and that good policy pushes out the political
limits to action.
Now consider a recent argument that gets all of this wrong. It comes from Jesse Jenkins of The Energy Collective; I was pointed to it by the usually insightful David Roberts, who in this case misses the boat. The Cliff Notes version goes like this:
1. Carbon accumulation in the atmosphere is the result of GDP growth and existing technology.
2. We don’t want to cut GDP growth, so the solution is technological innovation, primarily in energy.
3. Carbon pricing itself can’t accomplish this. The correct price would
equal the social cost of carbon (the damage done by emitting an extra
ton, monetized), but voters are unwilling to support taxes this high.
This is because such taxes would achieve their purpose only through
massive cuts in per capita income (GDP).
4. But modest carbon prices will generate revenue. This revenue can be
channeled by government into R&D. Just like government-financed
research gave us the internet, it can give us the future energy
technologies that will put the global economy back within ecological
limits.
Almost every detail of this argument is flat-out wrong, and the totality
rolls the rock back down the hill and calls it a monument.
Just to give a little more heft to the starting point, read through this excerpt from a letter to the Financial Times by political scientist Roger Pielke Jr., quoted with approval by Jenkins:

Carbon emissions are the product of (a) GDP growth and (b) technologies
of energy consumption and production. ... Thus, a “carbon cap” actually
means that a government is committing to either a cessation of economic
growth or to the systematic advancement of technological innovation in
energy systems on a predictable schedule, such that economic growth is
not constrained. Because halting economic growth is not an option, in
China or anywhere else, and technological innovation does not occur via
fiat, there is in practice no such thing as a “carbon cap.”Where
carbon caps have been attempted, clever legislators have used gimmicks
such as carbon offsets or set caps unrealistically high so that negative
effects on GDP do not result and the unpredictability of energy
innovation does not become an issue.It
should thus not come as a surprise that carbon caps have not led to
emissions reductions or even limitations anywhere. China will be no
different. The sooner that we realize that advances in technology are
what will reduce emissions, not arbitrary targets and timetables for
reductions, the sooner we can focus our attention on the serious
business of energy innovation.

So what’s wrong?
1. Pielke sows confusion with the word “technologies”. In the standard
IPAT decomposition, where Impact equals population times Affluence (GDP
per capita) times Technology (impact per unit GDP), technology refers to
the technologies in use, due to both how goods are made and what goods
we use. This is the relevant definition for understanding carbon
emissions. It does not mean “everything we currently know about how to
produce stuff”, which is how it is sometimes used by economists. What
Pielke is doing is appealing to the logic of the first definition in
order to invoke the second. By a type of verbal illusion, he brings us
from a recognition that how we produce stuff is crucial to the claim
that everything depends on inventing new ways of doing it.
What he leaves out, of course, is substitution. Even with existing
“technology”, in the sense of everything we currently know, we have
quite a bit of scope for producing things differently and changing the
mix of what we produce. We can use fuel-efficient cars rather than
guzzlers. We can teleconference rather than fly people to distant
locations for meetings. We can build wind turbines and the grid needed
to support them rather than more coal or oil infrastructure. There are
gobs of opportunities for substitution in a modern economy, and the
first purpose of pricing carbon is to make them happen. This is not
speculative. Countries like the US, which have lower taxes on energy
products, have higher energy consumption per unit GDP than countries,
like those in continental Europe, that have higher taxes. There really
is a law of demand out there.
2. Innovation responds to prices. When the price of computer RAM
collapsed, software companies started cranking out feature-bloated,
RAM-intensive products. Funny thing about that. As fossil fuel prices
appear to move to higher plateaus, Boeing and Airbus work on more
fuel-efficient planes. No one made them do this; it’s how markets work,
for better and worse. This is not to say that governments can’t speed
up the process by subsidizing research that private firms won’t
undertake—of course they can. But we will make a lot more progress a
lot faster if carbon is expensive and there are financial incentives to
economize on it.
3. The social cost of carbon is a chimera. There is no way to put a credible price tag on a ton of carbon. It’s the wrong way to think about what the problem is.
(Insurance is the right way.) This means you can’t denounce carbon
pricing because it fails to achieve some sort of “objectively correct”
level. It’s simply a tool to be used in conjunction with other tools.
4. There are lots of things that can be done by way of regulation to
reduce carbon emissions, but most involve inconvenience. You can force
people to change how they build houses or what standards have to be met
by appliances, but in practice this means people will have to do things
they would not otherwise do. Sometimes that’s not a problem: people
often lack information and will be just as happy doing the regulatory
thing as whatever they were doing before. Quite often it is a problem:
you prevent people from doing something they actually prefer doing. For
instance, you can change the parking rules so that people can’t stay
more than 15 minutes in a parking space for a large swath of a city.
This will force them to use other modes of transportation but it will
piss them off. Just as there are limits to the acceptability of carbon
prices, there are limits to the acceptability of regulations. You want a
mix of measures that pack the most emission reductions within the
existing political constraints. As you back off on one mechanism, like
prices, you are more vulnerable to the constraints on the others.
5. And now a word about what determines those constraints. Yes, the
higher the carbon price the less willing people will be to vote for
them. But that constraint can be relaxed by structuring your program to
give money back to the citizens in as visible a way as possible. How
much relaxation is not known at this point and may depend on other
factors as well, but we need all the relaxation we can get. That’s why
taking carbon revenues and funneling them to businesses to promote
R&D is really counterproductive. (a) Give them back to voters. (b)
Don’t give them to businesses, which will get voters even angrier.
6. In any case, the binding constraint today is not the voter but the
CEO. The business community wants to fob the cost of pricing carbon and
substituting other products and methods onto anyone else they can, so
what we get are loophole-ridden systems in countries that have carbon
pricing and no carbon pricing at all in places like the US. But that is
not about policy design—it’s simply the deep political economic funk
we’ve all fallen into. To do anything else, whether about
macroeconomics or the climate, we have to find a way out of post-democracy.